David B. McNab, CA writes about customer value and customer profitability based on his 20-plus years of experience working with world leading banks, telecommunications and loyalty companies. David's articles include seminal works on management information and customer intelligence.

Teaser rate campaigns have become commonplace for acquiring
and cross-selling client deposit and investment balances but most banks we talk
with struggle to know whether they are really delivering the value that was
hoped for.

The most common questions we hear are:

Are we bringing in new money or cannibalizing
our existing base?

Does the money stay in the bank when the
campaign ends?

Knowing the splits between new money and product
substitution is critical to understanding the return on investment of any teaser
rate campaign.Balance growth from the
campaign will inevitably include significant amounts of product substitution –
in fact even without a teaser rate offer a third of account balance growth in a
US regional bank’s demand, term and mutual fund deposits is actually funded by
internal substitution. Under a teaser rate scenario, the substitution effect is
significantly amplified.

To understand the real value of a teaser campaign you need
to deduct the profitability margin you were earning on the “old money” from the
margin you are getting on the campaign target funds. To do that you need to
know which products the old money was coming from so you can attach the right
margin to each source of old money. To do that you need to be able to measure
the flow of funds between all the accounts in your portfolio, which is where
the challenge lies.

Similarly, once the campaign teaser rate period is over
there is typically some run-off in the deposit funds in the target product. To
the extent that the product level runoff stays within the bank the campaign results
can include the margin of the successor product as part of the value added.
Again the key is isolating where the money flows to within the bank – and
knowing how much actually leaves after the expiry of the teaser incentives.

Both of these issues are solved by measuring the flow of
funds into, out of and among products in your portfolios and there are two ways
to achieve this. The first approach is to analyze the transaction details of
every deposit that occurs in the campaign target product. This is impractical
due to both the cost and complexity of trying to trace flows through the
systems of the bank. Most money flows from one product to another by passing
through a demand deposit or suspense account which makes tracing transaction
flows extremely difficult.

The second way is
through a patented analytical technique that enables banks to measure flows of funds into, out of and across the bank product portfolios at the account level
without having to dig through transactions or make high level assumptions that
produce doubtful results. If you want to understand if your teaser rate campaigns
are really working, please talk to us
about how our FlowTracker solution can enable you to truly understand and
measure money in motion at your bank.